Prepared Testimony of Dr. Richard T. Cupitt
Associate Director and Washington Liason
Center for International Trade and Security
University of Georgia

10:00 a.m., Thursday, June 24, 1999

Mr. Chairman: Thank you for the invitation to address the Committee on Banking, Housing, and Urban Affairs regarding
legislative efforts to reauthorize the Export Administration Act (EAA). I am a member of the political science faculty at
the University of Georgia and serve as the head of the Washington office of the Center for International Trade and Security
(CITS), an interdisciplinary, policy-oriented research institution of the University of Georgia. For more than a decade,
Center staff have focused their research and service efforts on export control issues in the United States, the former Soviet
Union, China, India, and elsewhere. Through their research, the Center staff hope to promoting prudent export control
policies that encourage legitimate commercial activities while strengthening U.S. and global security. Please note that these
remarks represent my personal views and not necessarily those of the Center or the University of Georgia.

I will address several aspects of the draft legislation, but I base all my remarks on three assumptions:

Export controls remain a relatively low cost means of delaying the diffusion of proliferation-related
technologies or raising the costs of such transactions, buying time for other nonproliferation policies to work;

If national and multilateral export control systems are not improving, then they are getting worse, as
determined proliferators are always seeking new ways to gain access to sensitive technologies; and

Effective export control policies depend on a partnership between government, industry, and the public.

Finding a prudent balance of the many security, economic, and other interests inherent in nonproliferation
export control policy is one of the most difficult tasks facing the U.S. government. If this Committee can craft
what becomes a new Export Administration Act, it will overcome a major impediment to U.S. efforts to
improving export controls here and abroad.

Control Lists and Country Tiers

The draft legislation creates a new system of country groups (i.e., tiers) and multiple control lists (i.e., the
Expedited and Critical Lists as subsets of the National Security List). The tier system is more logically coherent
than the system of country groups used by the United States during most of the Cold War era. Determining
which countries will go into which tiers, especially which countries end up in Tiers 3 and 4, however, will
certainly create controversy and the executive branch may require more than the sixty days allowed in the
legislation to generate the list.

The system of multiple lists marks the reintroduction of a "watch list" approach used by the United States in the
early days of the Cold War. This appears to be an attempt to reduce the licensing burden on business and
government by implementing the second element of the "higher fences, fewer goods" strategy. The Expedited
List will serve this purpose only if sufficient items appear on the list to make a significant impact on the numbers
of licenses processed. If only a small number of mainly insignificant items comprise the Expedited List, it will
only succeed in making an elaborate export control system even more complex. In that regard, I suggest that
the Secretary of Commerce report annually on the impact of this list design system on the licensing process.

Licensing Process

Perhaps the most important change in the license review process proposed in the draft legislation is the shift to
consensus rather than majority voting in the Review Committee (currently called the Operating Committee).
Given the sharp increase in cases reaching this level (from 122 in 1995 to about 1,000 in 1998), stalemate in
the Review Committee could become a major bottleneck in the licensing process. Although there is no public
data on the number of cases where agencies issued a dissenting vote in the Operating Committee, in only 29
cases did an agency raise the case to a higher level when it objected to the majority decision or the decision of
the chair of the Operating Committee (who can overrule a majority decision). This suggests that decision by
consensus may pose relatively few practical problems.

The proposed legislation also adds to the strict time limits for licensing decisions by the Review Committee and
higher bodies. This does not appear to match the time that additional investigation, such as conducting a pre-license check, may require. Allowing agencies to stop the clock to obtain additional information at this stage
will prove useful in some cases.

Sanctions

The general literature on sanctions suggests that narrow sanctions targeting the parties directly responsible for
non-compliance usually have a better chance at eliciting conformity with the rules one attempts to enforce.
Some evidence exists that narrow sanctions on entities of proliferation concern, or the threat of such sanctions,
have promoted compliance with nonproliferation norms. Discussions with representatives of sanctioned entities
in China and Russia indicate that U.S. sanctions imposed real costs (even if only in terms of a damaged
reputation) and generally spawned increased efforts by the entity in question to address the proliferation issues
raised by the United States. Moreover, such sanctions have also heightened awareness of nonproliferation
and export control issues in a wider set of enterprises and government entities, helping to move the whole
system toward greater compliance.

These same cases, however, suggest that sanctions should not be a first resort. At one recently sanctioned
Russian entity, for example, the enterprise manager and the enterprise's export control officers believed they
had made a good faith effort to comply with Russian law and MTCR Guidelines. Although clearly willing to try
to accommodate U.S. concerns, the enterprise officials appear to have had little direct contact with U.S.
government officials on the matter before the United States imposed sanctions. In another instance, the arms
control program of a key Chinese nuclear organization only discovered it had been placed on the Entities List
through information obtained through the World Wide Web, not through any direct contact with U.S.
government officials. In both instances, more direct contact with the entities in question might have proved
fruitful in addressing U.S. concerns.

Penalties and Enforcement

For many potential violators, the monetary penalties associated with the old EAA posed no compelling reason
for compliance. By sharply increasing the penalties for violations, the draft redresses this problem and helps
implement the first element of a "higher fences, fewer goods" strategy. The draft could go farther, however, in
the emphasis it places on enforcement by:

Including sound and compatible national enforcement policies among the criteria for an effective multilateral
export control regime; and

Making enhanced cooperation and transparency on enforcement issues a major item for negotiations with
other members of the supplier regimes (as the current draft only includes this as an objective in negotiations
with non-members).

Enforcement remains a weak link in implementing nonproliferation export controls in many countries, as many
governments appear to rely on a "trust-based" enforcement system, rather than the "trust, but verify" approach
taken by the United States. Among other negotiating objectives, the United States could seek to increase the
penalties imposed by other governments to match U.S. penalties, and to increase the resources countries
devote to enforcement. The United States also could attempt to negotiate better approaches to detecting
violations and imposing sanctions at the multilateral level. This might include better modalities for and more
extensive use of pre-license checks and post-shipment verification by other countries. Even if these efforts do
not succeed in developing a multilateral response, they make U.S. sanctions consistent with a broader effort on
enforcement.

Obligations for U.S. Exporters

The proposed legislation appears to eliminate the Entities List and shifts the primary burden for end-user
determinations back to the executive branch. This should not, however, relieve exporters from reasonable
obligations to assess the end-use and end-user of its products or services. Japanese industry, for example,
worked with the Ministry of International Trade and Industry to develop specific criteria to include in export
contracts. These criteria apparently meet the nonproliferation concerns of the government while limiting their
obligations and liability. Here, the Secretary of Commerce, in consultation other agencies, the Regulations and
Procedures Technical Advisory Committee, the President's Export Council Subcommittee on Export
Administration, trade associations, NGOs, and other bodies, could create a set of reasonable obligations for
U.S. exporters regarding end-use and end-user determinations, such as following the guidelines on "red flags."

In some other international regimes, moreover, non-governmental entities can play an important role in
improving compliance with regime norms. Action by insurance companies, professional societies, trade
associations, and other groups can improve monitoring, impose significant sanctions for non-compliance, and
so on. In this instance, the federal government might establish a means for the private sector or other NGOs or
the international community to provide authoritative audits of end-users, and provide some reward or relief from
liability for exporters that use these audits. Several companies already attempt to provide these assessments
for exporters and investors. If these companies are well regulated, then rewarding exporters for seeking such
counsel through swifter licensing or using these practices as a mitigating factor in the prosecution of violations
seems a reasonable means to secure greater industry compliance and prevent cases of sensitive technology
ending up in foreign nuclear weapons laboratories.

Multilateral Initiatives

In addition to the issue of enforcement, the proposed legislation appears to limit the capacity of the President to
enter into new national security supplier arrangements. In the case of high-performance computers, for
example, the legislation would make it more difficult for the United States to build a broader multilateral
arrangement based on its current bilateral agreement with Japan. Similarly, this would restrict the capacity of
the United States to replace the Wassenaar Arrangement with a more robust institution. As important, as
proliferation concerns related to new technologies evolve, such as in the area of bio-technologies or software
viruses, the United States and the international community may need to construct new and distinct export
control arrangements rather than attempt to absorb these concerns through existing multilateral structures.

The EAA and U.S. Leadership

By virtue of its capabilities and interests, the United States plays a leading role in promoting nonproliferation
export controls around the world. The inability of the U.S. government to craft a firm legislative foundation for
its own controls on the export of dual-use goods, technologies, and services over the last decade, however,
has compromised U.S. leadership initiatives. When the legal basis for nonproliferation export control laws is
one of the first concerns raised by U.S. officials in discussions with representatives from the states of the
former Soviet Union, the absence of an EAA at best embarrasses the United States and at worst, makes the
United States appear hypocritical. In discussions with hundreds of foreign government officials in more than
two dozen countries throughout the 1990s, I found that many wanted the United States to take a position on
key export control issues, such as catch-all controls, so that they could develop complementary policies and
practices. Without the policy guidance a new EAA could provide U.S. officials in international negotiations,
however, these officials eventually crafted their own solutions to export control issues when they could no
longer wait for the United States to act. Although international cooperation on nonproliferation export control
policies has increased substantially during the last decade, the lack of an EAA has reduced the capacity of the
United States to influence the direction, scale, and pace of such cooperation. Most important, if the United
States can not coordinate its export controls with its partners, then the regimes will become less effective and
less fair, as those attempting to acquire weapons of mass destruction will be able to exploit more differences
and U.S. businesses will likely face more restrictions than their foreign competitors.

Conclusion

In my discussions with hundreds of export control officials from dozens of countries during the last decade, I
often emphasize that strong export controls improve their trade prospects, not diminish them. There is some
anecdotal evidence to support this argument. Poland, the Hong Kong Special Administrative Region, Taiwan
and other governments that have adopted robust nonproliferation export controls in the 1990s, for example,
increased their exports through access to U.S. technology and investment. Parallel promises of access to
foreign technologies, however, are not quite as significant an incentive for U.S. industry. Nonetheless, effective
and fair national and multilateral export control regimes can help secure the stable foundation and a level
playing field upon which U.S. trade and commerce depend. Even for the United States, a prudent system of
national export controls is trade enhancing, not trade restricting.

Again, I thank the Committee and the Chairman for giving me this opportunity to speak.